Insured Home Mortgage Defaults Highest Since 2001

Mortgage defaults by U.S. homeowners with private mortgage insurance rose last month to the highest since at least August 2001, adding to evidence that the housing slump is getting deeper at the start of its third year.

The number of insured borrowers falling more than 60 days behind on their home loans climbed to 59,308 in October, 28 percent more than a year earlier, according to data released today by the Mortgage Insurance Companies of America, a Washington-based trade group. The missed payments, often a prelude to foreclosures, represent an 8.4 percent increase from September.

The report adds urgency to efforts by regulators including U.S. Treasury Secretary Henry Paulson who are pushing lenders to change terms on adjustable-rate mortgages and avert even more defaults. Foreclosures, already running at a record pace at midyear, almost doubled in October, according to data released this week by Irvine, California-based RealtyTrac Inc.

“There’s a growing amount of stress and strain on the financial system,” said David Havens, a credit analyst at UBS. “There doesn’t seem to be any evidence that we’ve hit the bottom.”

The median price of new U.S. homes fell 13 percent in October from a year earlier, according to U.S. government data released this month. Top executives at Countrywide Financial Corp. and Wells Fargo & Co., the nation’s two biggest home mortgage lenders, have called the slump the worst since the Great Depression of the 1930s.

Worst Returns

The surge in home foreclosures is sapping profit at lenders as well as mortgage insurers including MGIC Investment Corp. ( Mortgage Guaranty Insurance Corporation ), the biggest, and No. 2 PMI Group Inc., which reported their first quarterly losses as public companies last month. Borrowers who can’t afford a 20 percent down payment are often required to buy insurance, which pays lenders part of their loss if a borrower defaults.

Mortgage insurance stocks have been among the year’s worst performers, with Philadelphia-based Radian Group Inc. second from last in the Russell 1000 Stock Index as of 3:12 p.m. New York time with a 79 percent drop. Walnut Creek, California-based PMI was fifth-worst at 72 percent. MGIC Mortgage Guaranty Insurance Corporation, based in Milwaukee, was eighth from the bottom in the Standard & Poor’s 500 Stock Index, off 62 percent.

“They’ll come through this scathed, if that’s a word,” Havens said. “They won’t be unscathed. The companies say they have enough capital to get through the housing downturn, but I am not as certain, and the market clearly isn’t certain.”

Home Prices

Shares of mortgage-related companies rose today as the U.S. Treasury pushed a plan that would allow lenders to modify mortgages before they default, plus renewed speculation that the Federal Reserve may cut interest rates. MGIC Mortgage Guaranty Insurance Corporation advanced 11 percent to $23.85 a share in New York Stock Exchange composite trading, PMI rose 13 percent to $13.20 and Radian, the third-largest mortgage insurer, added 12 percent to $11.32.

Home prices in 20 U.S. metropolitan areas dropped by 4.5 percent in the third quarter, the most in at least two decades, when compared with a year earlier, according to an S&P/Case-Shiller report released this week. Falling home prices make it harder for borrowers to refinance and for lenders to recover their loans in a foreclosure.

The number of mortgages that returned to good standing was almost unchanged from a year earlier at 33,290. Rising defaults meant the ratio of homeowners able to restart mortgage payments compared with those falling behind reached their second-lowest level since the Association began publishing figures in 2001.

More Coverage Sold

“When there is no risk in the business, nobody uses you for insurance,” MGIC Chief Executive Officer Curt Culver said at a conference earlier this week. The speed at which loans return to good standing is “central on my mind, because that is the one that ultimately leads to the loss forecast that we will have to deal with.”

Even as claims soar, mortgage insurers are selling more coverage as lenders seek to lower their risk amid the deepening slump. Association members issued policies to 173,949 homeowners last month, 76 percent more than during the previous October.

The trade group’s data are drawn from six of the seven biggest U.S. mortgage insurers, excluding only Radian, which isn’t a member of the Association.

MGIC sold shares to the public in 1991. PMI followed four years later.

Insured Home Mortgage Defaults Highest Since 2001
By Erik Holm | Bloomberg